Bank of Canada to cut rates again

MartinCej

OTTAWA (CBS.MW) -- With the federal and provincial governments unlikely to cut taxes to spur growth anytime soon, the Bank of Canada is expected to go it alone Tuesday and slash lending rates by half a percentage point.

The Canadian central bank has already lowered its key lending rates by 225 basis points so far this year in a bid to revive the domestic economy as U.S. demand for Canadian goods and services wanes. Canada and the U.S. are the world's biggest trading partners, so the U.S. slowdown has toppled the Canadian economy.

Last year, about 87 percent of Canadian exports wound up in U.S. factories, shops and homes.

"In Canada, it's an easy choice for the Bank of Canada -- cut rates a half point, and show it's ready to fight the battle against recession," said Avery Shenfeld, the senior economist at CIBC World Markets.

The Bank of Canada last lowered rates by a half point on Sept. 17, cutting its target for overnight lending, which is most comparable to the Federal Reserve's fed funds rates, to 3.5 percent from 4 percent. The so-called Bank Rate that sets the upper end of a 50 basis point range, the midpoint of which is the overnight target, was cut to 3.75 percent from 4.25 percent.

In the U.S., the Federal Reserve has cut rates nine times this year, dropping the benchmark fed funds rate to a 39-year low of 2.5 percent. U.S. rates have tumbled 4 percentage points as the Fed fights to pull the U.S. manufacturing economy out of its longest contraction since the World War II.

The U.S. slowdown has been devastating to the Canadian economy, which relies on American demand. Statistics Canada reported Friday that the country's merchandise trade surplus shrank more than expected in August as exports dropped to their lowest level in 17 months.

Canadian companies exported about 34.1 billion Canadian dollars ($21.8 billion) in goods in August, a decline of 3.4 percent from July, and the lowest mark since April 2000. Imports slipped 0.9 percent to C$29.7 billion, handing the country a surplus of C$4.4 billion, short of the $5.4 billion surplus anticipated by economists.

Canada had a surplus of C$5.4 billion in July and C$8.4 billion in January of this year.

In the U.S., the Commerce Department said the country's trade deficit narrowed to its lowest point in 19 months as the weak economy tempered imports. See full story.

"A fresh tax cut or spending stimulus doesn't seem to be coming from Ottawa," Shenfeld said. "While (Federal Reserve Chairman Alan) Greenspan is being joined by Congressional tax and spending action, (Bank of Canada Governor) David Dodge is on his own in trying to restore growth."

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